Buffalo Wild Wings: Was the Reaction Right?

Shares of Buffalo Wild Wings (NASDAQ: BWLD) soared after the company initially reported earnings last week, only to fall by double digits in the session that followed its after-hours announcement. Given the fundamental falloff from companies like Darden Restaurants (NYSE: DRI) , and the rarity of growth from peers like Chuy's Holdings (NASDAQ: CHUY) , is Buffalo Wild Wings now a buy?

One sector but three segmentsBefore going further, there is one fundamental fact to understand: The restaurant sector is no longer one entity.

Today, restaurants are separated into three segments. There's fast-casual, which consists of fast-growing companies like Chipotle, Panera Bread, and Potbelly. Then there's fast-food such as McDonald's and Yum!, which are obviously challenged. Finally, there are sit-down restaurants like Darden and Buffalo Wild Wings, also a much-challenged space.

Yet despite this challenging environment and the consumers gravitating to restaurants that provide the quality of dine-in with the speed of fast food, Buffalo Wild Wings has proven itself to be one of the last remaining true growth companies in its space.

Take Darden, for instance: This is a company that's constantly on the brink of a breakup. Darden has industry-low margins due to an excessive cost structure; it has $5 billion in liabilities and is undergoing numerous changes. Most notably, after years of discussion and speculation, Darden is going to rid itself of Red Lobster via a spinoff or sale. Then, the rest of the company remains in question, as many believe its property holdings will be rolled into a REIT.

Still, the driver behind this decision is same-store sales that are falling off a cliff, and while Darden may be an extreme case, lower traffic and falling sales have been largely a consistent throughout this dine-in space.

The dine-in exceptionBuffalo Wild Wings is bucking the trend of dine-in restaurants, and this was seen in its fourth-quarter earnings report.

The company reported revenue growth of 12.4%, which includes same-store sales growth of 5.2%. The company's cost of sales also declined 40 basis points, another fundamental metric that's bucking the trend of the overall segment.

With that said, Buffalo Wild Wings also spoke of plans to expand internationally and to implement new store concepts, which could drive growth further.

Essentially, Buffalo Wild Wings is an exception in this challenging environment.

But what about Chuy's?Of course, there are a few other companies like Buffalo Wild Wings that continue to grow, such as Chuy's.

Yet, there are still facts that make Buffalo Wild Wings more impressive. For one, Chuy's has top-line growth of 19%, but its same-store sales gain is just 3.1%. Chuy's is a smaller company with just $200 million in total revenue -- Buffalo Wild Wings is six times larger -- therefore it has managed to grow by simply expanding stores combined with a very conservative same-store sales performance.

Buffalo Wild Wings, on the other hand, is large and well established but is growing its existing stores at a faster rate than Chuy's, which is very impressive.

Essentially, as a company grows larger, existing store growth becomes harder. Yet Buffalo Wild Wings, with its "wings, beer, and sports" approach, has found a niche market and a loyal customer base. Chuy's, on the other hand, is just another Tex-Mex restaurant, hoping to perform like Chipotle, but it is not.

Why the fall?So the million-dollar question might be why Buffalo Wild Wings fell by double digits after its earnings. Clearly, the company had a strong report, and it was trading higher in after-hours. What happened?

Honestly, it's hard to explain. The company might face higher expenses with labor and chicken wings, but not in the immediate future, and if you look at the fourth quarter, both areas worked very well in the company's favor.

As a result, the stock loss might be value-related, as Buffalo Wild Wings has soared more than 450% in the last five years. Thus, investors might be taking profits.

While this is likely, investors should note that at 34 times earnings, Buffalo Wild Wings is not as expensive as companies like Chuy's, which trades at 51 times earnings. Therefore, Buffalo Wild Wings might continue to fall, but if you look at the fundamentals, it appears that the stock's initial post-earning gains were the correct reaction.

Thus, it would seem that if such growth continues, and expenses are held in check, Buffalo Wild Wings' loss should prove to be an excellent buying opportunity long-term.

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